So, I wanted to write a little article to explain how HST works since there has been so much controversy over it in the last while. Basically, the last straw was seeing another petition in a SubWay I was patronizing and I decided I needed to at least write something to explain how much of a good thing it is and how businesses have been trying to pull one over on us.
As you may know HST (Harmonized Sales Tax) is going to be implemented across Canada on July 1, 2010. But what you might not know are the facts, reasons and functions of this new tax.
HST is similar to a VAT style tax which is used in 130 different countries around the world (England, France, Germany, India, China, etc.) and works in the opposite way to PST / GST which is a cascading style of tax.
What GST/PST does is tax everything that businesses buy as well as everything that consumers buy. Which means that by the time you are purchasing something like a meal at a restaurant, your mean will have include the cost of taxes a couple times over. Including the tax paid on the cooking equipment (stoves, fryers), taxes paid on the plates, taxes paid on the uniforms, taxes paid on the raw food ingredients (some) and many other inputs used to produce your meal. So as the restaurant pays taxes on these inputs, they have to build the prices of your meal around the cost of paying these taxes to the government. This is what is called embedded taxes. Your meal is now $12 instead of $9 because the business had to pay GST/PST to get that to your plate.
This is not just the case for the food insustry, it also makes a huge difference in the real estate development market as well. Concrete, lumber, granite, steel, drywall are all inputs to building houses and they are all taxed as they are purchased as raw inputs before you buy the final house. Ultimately this drives the cost of housing up and up as developers need to recoup the cost of this embedded GST/PST.
This is not to mention the additional burden on accounting teams for the businesses who have to perform an often complex reconciliation of tax in vs. tax out to figure out what they owe to the government. This is built into the price of things as overhead.
HST will be the opposite; a business will NOT pay tax up to the point of the final sale. IE, they won’t pay for the inputs used to cook your meals or build your houses. So the embedded PST cost will not be there. So where you used to pay the price (cost of inputs + embedded taxes) + GST/PST, you will now only pay the price + HST. This will lower your overall spending and make it less expensive to do business in Canada.
Now, here is where the miscommunication and frankly the misleading of you comes in by businesses (restaurants are the most guilty of this from what I have seen). A business claims this will simply cost you MORE money… but the whole point of this is to take the tax burden off of the business so they will DROP their prices (they will pay less tax and have less costs, so they are expected to pass it along to the consumer). Now if they keep their prices the same, YES you could pay a bit more, but you can be sure that the business will be saving more than the additional taxes they are charging you and could drop their prices accordingly. If they do not drop their prices, then you need to visit another establishment.
The whole point of this entire exercise is to drop the prices of consumer goods (everything from meals to houses) to INCREASE consumer spending (things are less expensive, more people will spend money). When consumer spending is increased in an economy it drives businesses to expand (they will earn more revenue) which means they can hire more people and spend more money (investment in new restaurants, more developments, etc) which starts a wave of investment and economic growth. 🙂
So I assure you, if a SubWay wants you to sign a petition, tell them to “suck it” because really, they will be saving a lot of tax money soon, and they need to decrease their prices to more than offset the HST. Please be aware of this point and maybe take a look at some of my reference links below for more information.
Thank you and have a nice day,
Mike
References:
http://www.gov.bc.ca/hst/ – there is a good video here at the bottom entitled “HST: How it Works”
http://en.wikipedia.org/wiki/Harmonized_Sales_Tax
http://en.wikipedia.org/wiki/Value_added_tax
Very interesting and informative article.
Totally agree, been saying this for a while now too. I think a lot of places are initially going to take advantage of the HST to simply add $ to the price of everything and make extra profit because the general public is expecting it; they won’t be seen as the bad guys. I’m already seeing it at some places where they have raised the prices of goods saying they are doing it prematurely and will keep the prices constant (after the raise they just did) when HST comes into effect.
@_|_, this artificial inflation should be counteracted as businesses realize they are able to decrease their prices to compete better. If your sales are down, the LAST thing you are going to do is raise your prices more. This of course is more applicable to elastic goods (ie, not gas) because as the price drops, revenue will increase. Econ 101.
The main defense I have heard to this is that businesses won’t drop their prices because somehow they will all agree together and keep them high. This is known as a cartel and exists in counteraction to the prisoner dilemma which states that there will be at least one business who will drop their prices to undercut their competitor and as soon as this happens prices drop to a new equilibrium below the original.
Actually, the HST and the GST are very similar in character, as both are value-added taxes. Businesses pay the GST or now the HST on almost everything that they buy. The HST taxes are paid, but they are then deducted from the amounts collected when the return is filed. The old GST never formed a part of the business’s cost and does not compound. The old PST is a horribly complicated system, full of regulations with different rates for different things, exempt goods, exempt purchasers and complicated regulations. As an accountant, I am not sorry to see tje PST disappear. The problem with HST is that it now applies to a whole range of things that the old PST did not. In my view, the rate of HST should be reduced to, say, 10% to allow for this fact. As far as businesses reducing their prices, for most of us the amount of PST we are now saving is not that significant – with the largest portion of our costs being labour on which there is no PST portion to be saved under HST. Sure you are correct that businesses will save the PST on some of their costs, but it will not be enough to compensate for the added tax. I think that it is unfair to say that restaurants should reduce their prices because very little of what they buy (labour and foodstuffs) contain any PST element to save.